Dislcosure Agreements

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					                                     CONTRACTS II

I.   Avoidance of Contract:
     Defenses to enforceability: (1) duress; (2) fraud (yea I signed, but they misrepresented);
     (3) unconscionability (I didn’t know what it meant); (4) illegality.
     A.      Defects in the bargaining process
             (1) Fraud and the duty to disclose
                 Morta v. Korea ( claims fraud when insurance co. denies him
                  He freely entered into a settlement that released all claims
                  He sought counsel from a lawyer
                  Rule: fraud requires intentional misrepresentation of fact (or law),
                     and reasonable detrimental reliance on the misrepresentation.
                  R §§161- 169 (silence is not always active lying…but sometimes it is
                     the equivalent)
                  R§161: Silence is an assertion: (a) duty to update or correct
                     misstatements (R §162 (2) : misrepresentation is material if…) ; (b)
                     must have good faith under the circumstances; (c) (very rare) duty to
                     correct for another in a writing; (d) fiduciary duty.
                  Note: for a 161 (a) need some fraud and some misrepresentation. (fraud
                     without misrep. may not be actionable if unmaterial b/c judge will dump
                     it if the facts are trivial)
                  §163: When a misrepresentation prevents formation of a contract
                     (must be EXTREME and it is very rare)
                  §164: when a misrepresentation makes a contract voidable…

                 Laidlaw v. Organ (111 hogsheads is seized back when vendee is silent as to
                 the increase in value of hogsheads)
                  must a vendee communicate to the vendor information exclusively
                      within his knowledge if it may affect the value of the commodity
                  rule: generally, no buyer dislcosure in order to create incentives to
                      have successful contracts.
                  Viciate: means to nullify as a function of fraud
                  R §159: A misrepresentation is an assertion that is not in accord with
                      the facts.
                  Remedies for misrepresentation: recission or restitution (damages), can
                      be either tort or contract claim. (see p. 485) In addition to ordering
                      recission, a court will generally direct a downpayment to be returned in
                      light of a restitution.

             (2) Unconscionability (UCC §2-302…in order to prevent oppression and
                 unfair surprise)
                 (a) Consumer
                     Cutler Corp. v. Latshaw (contract calls for confession in boilerplate
                      Principles of unconscionability: (1) default rule of not looking into
                         consideration can sometimes go too far (if print is too small or the
                         language is hidden, law can say no); (2) this puts pressure on future
                         contracts to insure that provisions are explained or initialed or they

                          tell you to go see an attorney before signing; (3) this terms effect was
                          so drastic that they should’ve been more telling (NO CAVEAT
                         Rule: where an important clause is in fine print and buried
                          within the body of the form contract, it is unconscionable.
                          (procedural and substantive unconscionability)

                      Williams v. Walker Thomas
                       Highest court says unconscionable: (1) circumstances in which she
                         signed it; (2) inequality of the bargaining power; (3) her personal
                       Procedural: was there a meaningful choice
                       Substantive: the term should be minimally fair (must be an objective
                         standard: whether or not the term, as it applies, is unconscionable).
                       Procedural: (1) exploitation; (2) education; (3) opportunity to read it;
                         (4) NOT THAT POOR PEOPLE CAN’T CONTRACT. Court
                         establishes minimum decency before a tough term operates in a
                         tough fashion (dragnet clause). Any inequality is not
                         forbidden…just need meaningful assent opportunity.
                       Here, the dragnet clause has a high procedural unconscionability (not
                         even lawyers understand how it works)
                       Substantive: goes to what the term says to the fairness of the
                       You don’t need to have both P & S…but you want at least S (no S,
                         nothing really unfair). You want at least S to go into court. (they are
                         mutually exclusive…you want to have both to have a good case)
                       Court didn’t find the dragnet clause unconscionable, they found the
                         process and delivery of the clause unconscionable (they way it
                         operated in the circumstances)

                      Jones v. Star Credit (§2-302 refrigerator case)
                       Court will extend, in rare cases, unconscionability to the price term.
                       Substantive unconsionability is the hook here…is this b/c of the
                          percentage (should it apply to pencils, erasers?)
                       UCC doesn’t define unconscionability b/c courts have roving power
                          to enforce unconscionability (see comments under 2-302: “in light of
                          commercial circumstances at the time K was made…”)
                       §2-302 is an opportunity for judges to just do justice

***see 1/28 for §2-202 hypos***

                  (b) Commercial
                      Difference between commercial and consumer, there is a presumption by
                  the court of equality of bargaining power…tougher to show procedural

                      Weaver v. American Oil (indemnification clause is signed by gas-
                      attendant, indemnifying American Co. for their negligence in setting him
                      on fire)
                       American Co. seeks a declaratory judgment to impose liability on the
                          gas attendant after American employees spray him with fire
                       Court finds unconscionability: (1) unequal bargaining power; (2)
                          BIG PROCEDURAL (the clause was never explained to him and he
                          only had a high school degree); (3) the actual clause was
                          substantively unconscionable.

                      Zapatha v. Dairy Mart, Inc. (dairy mart franchise owner seeks
                      unconscionable termination of his franchise agreement)
                       Court finds NO unconscionability: (1) equal bargaining position (he
                         had a year of college and business courses; (2) he was told to consult
                         an attorney and refuses; (3) he was given a chance to work with the
                         company; (4) company went extra mile to explain everything to him
                       Court finds no P or no S
                       Court here applies UCC by analogy and Restatements
                       R§208…(2-302 (1) counterpart) “unconscionability”
                       R §205…(1-103 counterpart) “good faith requirement”

      B.       Illegality: Unenforceable on grounds of public policy
               Illegality does not equal criminal…these are the types of things courts do not
      want to enforce. R§178…unconscionability on the grounds of public policy. If no
      clear legislative action, court applies balance: if interest in enforcement is clearly
      outweighed in the circumstances by the public policy against such terms. Hypo:
      robber sues to enforce his cut of the bank robbery. Court won’t enforce b/c this would
      create incentives to go out and perform illegal behavior.
               Examples of illegality:
                        (1) restraint of trade (e.g. no compete clause…even if you’re fired, you
                            won’t work for a competing business)
                        (2) contracts requiring performing of a tort (e.g., $500 to beat up Jimmy)
                        (3) contracts impairing family relationships in a bad way (e.g. $500 no
                            to marry Jimmy)
                        (4) contracts that, while not illegal, contravene a public morality (e.g.
                            $500 to you to spank my child)
                        (5) commercial bribes (e.g, agent pays producer $1 mill to contract with
                            a particular actor)
                        (6) criminal contracts (e.g, prostitution)
                        (7) contract against public policy (e.g., baby M case)

II.   Performance of the Contract
      A.     Determining the scope and content of Obligation
             (1) Integrated Writings and Parol Evidence (UCC §2-202…introduction of
                 parole evidence in contradicting or explaining an agreement)
                 Finality (reached agreement on the terms) & Completeness ( the total
             agreement package, no more terms to discuss). YOU MUST HAVE FINALITY
             TO HAVE COMPLETENESS! (see matrix) Note: later agreements can always
             be introduced (POLICY: lets people change their minds by later agreements)

                 Usage and trade important especially in defining trade-specific terms, b/c
            what it means is important. CAVEAT…parties can agree and contract around to
            indicate usage of trade does not apply.
                 Consistent additional terms: if the term you want to include would surely
            apply (or should’ve been included) the court will exclude it. Note: Consistent
            means anything that is not blatently inconsistent.
                 POLICY: parole evidence reduces the invitation to fraud by strengthening
            the power of the written agreement. Written agreements aren’t the contract, but
            simply the best evidence of the contract. Not just about evidence, parole
            evidence is never waived like other evidence rules…it is substantive law!
            R§209-213 (w/o 211)…different language but same process. The more complete
            the less likely the terms will be let in, especially as they become more likely to
            “should’ve been included” in the first place! §213 (2-202 equivalent)

***HYPOS: SEE §2-202 PROBLEMS***

                Mitchill v. Lath (contract to buy house subject to removal of the nasty ice
                house that never gets removed)
                    3 part test for introduction of an oral agreement: (1) collateral
                        (question is: is it related enough to the contract for the court to
                        consider that it was part of the agreement); (2) must not contradict an
                        express or implied term in the written contract; (3) must not be a
                        term that the parties would’ve ordinarily included in the contract.
                    Merger clauses in contracts can curb this problem…BUT: can still
                        introduce evidence to explain or supplement, just not additional
                    Note: there is no dispute between the parties that the term was stated.
                    JONES NOTE: If you contract in a rural area and you shook hands
                        with someone to remove the ice house, would you expect this type of
                        community to have put it in writing???

                Masterson v. Sine (dispute over the option to buy-back property given to
                family member)
                 Term is introduced that never existed.
                 CA opts for the more liberal rule of parole evidence…anything is
                   admissible so long as it won’t mislead the fact finder! (supposed to
                   remove the problems in the strict rule with failing to allow oral evidence
                   as to intent whenever there is the presence of a written agreement (in its
                   extreme situation))
                 Traynor here, wants to allow evidence of the oral agreement to go to
                   intent of the Mastersons… w/o liberal rule, there could be no
                   introduction since there was a written agreement.
                 Note: the husband here didn’t want his wife to get the property…he
                   wanted his sister to keep the property! On remand, you would have both
                   parties arguing that he had the exclusive right to buy-back the property.
                 Problem with circular reasoning: prior oral agreement that must be
                   excluded if completely integrated, but to determine this turns on whether
                   there is evidence of a prior oral agreement.
                 The court looks to the problem evidence to see if it is excluded (The
                   Masterson Paradox)

    Alaska Northern Develop. v. Alyeska Pipeline (contract subject to
    committee approval)
     Intent to contract had to be approved by the committee of Alyeska. The
       price term was left blank, so the manager filled in the blank and the
       board rejected the contract.
     Summary judgment granted for Alyeska
     Evidence that contradicts an integrated contract term is not
       admissible to aid in the interpretation of that term (“subject to
       approval clause”). It will be excluded if the court determines that the
       term should’ve been included in the writing in the first place.
      should’ve known that the whole contract was subject to the review of
       the committee.
     Partial integration: only some terms are done but all the terms aren’t in
     3 part test: (1) whether the writing was integrated with respect to the
       terms (if yes, excluded; if not, it may be introduced); (2) does the
       evidence contradicts or is inconsistent (if contradicts then its
       excluded; if not, then it may be allowed; (3) if the term is necessarily
       one that should’ve been included in the contract (if so, excluded; if
       not, it may be allowed)
     2 tests to determine inconsistent:
       (1) Hunt Foods v. Doliner : must contradict or negate a term of the
       (2) .Synder: the absence of reasonable harmony in light of the language
           and objectives of the contract. (more broad)
     permeable barrier around a written contract, very few parole evidence
       allowances…how does the court decide? (a) looks at the credibility of
       the evidence one party is trying to exclude; (b) court then needs evidence
       on parole evidence to see if it should allow the evidence.

    Luther Williams Jr. v. Johnson (financing for house is central theme at
     integrated clause…parties agree that no extrinsic evidence would be
     this case blends with unconscionability
     the clause here is so ambiguous that it struck the court as failing to
        indicate the objective intent of the parties
     parole evidence does not bar evidence of an oral agreement as a
        condition precedent to final written agreement.
     Purpose of parole evidence is to protect valid written agreements…BUT,
        if one party wants to introduce evidence of prior oral precedent to valid
        written instrument.

(2) Interpretation
        This section focuses not on the valid presence of a contract, but what do
    the words mean. The purpose of contracts is to protect the expectation
    interests of parties…what happens when these expectations differ in
    meaning? Words have no intrinsic meaning. Ambiguity arises out of (1)
    terms; and (2) syntax (poor unclear punctuation or omitted words). There is

also common language problems ( light can mean weight or to shine!).
Vagueness is unspecific terms (dog…what kinds). Ambiguity is a
combination of vagueness, and the two kinds of ambiguity (terms & syntax).
     2 approaches: (1) objective (supported by Williston and 1st Rest.: what
would the reasonable person believe). Problem: you can get over
paternalistic (doesn’t accommodate terms in a particular industry; court could
also tell parties they meant X when they say they meant Y; (2) subjective
(modern trend…supported by Corbin and R§201 is to look at what the
parties themselves intended and the expectations of the parties behaviorally.
Positives: it is truer to the intent of the parties and their behavior. Problems:
not easy to determine, and expensive to have evidence introduced AND
relies on fact-finder determination. Note: If the court can find the
subjective intent, they will apply the objective intent!

Pacific Gas v. G.W. Thomas (contest over the meaning of words)
     Steam turbine repair
     If UCC: Course of dealing (the relationship between these 2 parties
        in prior contracts), course of performance (how these 2 behaved
        previously under this contract), usage of trade ( what others in the
        industry do).
         If these conflict…court wants to honor the parties expectations:
             course of performance comes before course of dealing, comes
             before usage of trade.
     This is a dispute over the meaning of the terms.
     Question for the court: when unambiguous language on its face
        appears, should you hear parole evidence at all when it seems plain?
     Liberal view of parole evidence…context and language
        susceptibility (is it susceptible to the interpretation of the parties); if
        the language is particularly susceptible, then the judge will hear it!

Kemp Fisheries v. Castle & Cooke (recovery of damages from the broken
freezer in the chartered boat)
 Suit in admiralty so UCC doesn’t apply…
 the court refuses to allow introduction of extrinsic evidence b/c the plain
    meaning of the language in the contract is clear
 the test of admissibility of extrinsic evidence is whether it is relevant
    to prove a meaning to which the contract language is reasonably
    susceptible. (here the language is clear)
 the language of the contract provides that Bumble Bee maintain “good”
    quality of the vessel, not seaworthy.
 Courts often charge sophisticated parties with needing to read the
 Bar is raised for sophisticated parties
 Here, the language seems clear on its face, so it denies parole evidence,
    unlike Pacific Gas, which hears the evidence despite the plain language.
 Difference between interpretation (meaning; Pacific Gas& Kemp)
    and scope (terms/parole evidence; Mitchill v. Lath & Masterson)

            HYPO (The engagement ring)
             A contract is a promise for the breach of which the law provides a
             Courts generally won’t get involved in intimate family
             Court generally will protect the expectation interests of the non-
              breaching party

            Frigaliment Importing v. BNS (chicken case…what is a chicken?)
              ordered chicken (intending frying chicken)  sold chicken (stewing
             party who seeks to interpret the terms of the contract narrower than
                their plain use, bears the burden to so show. If that party fails, it
                faces dismissal.
             Was their a meeting of the minds b/c their definitions differed so much?
                J. Friendly later concluded this was a wrong decision for this reason
             Factors a court will turn to for determination of language: maxims,
                customs, newcomers to the trade, what the parties said, dictionary, usage
                of trade, etc.

            Gray v. Zurich ( being sued for assault and insurance company refuses to
            defend him b/c it was an intentional act)
             Insurance contracts are essentially adhesion contracts between parties of
                unequal bargaining power…contracts of adhesion are sophisticated and
                tough (these go against the drafter)
             Courts will generally view ambiguities in favor of the non-drafter of
                the contract!
             POLICY: (1) encourages the drafter to be less ambiguous; (2)
                discourages bad faith and hiding of the ball.
             R §201 (1) “subjective standard”; (2) if I knew you were operating
                under a misinterpretation then you prevail, b/c I should’ve told you!
             R §202 (1) circumstances and intent are given great
                weight…MEANING (looks to the meaning attached based on the
                circumstances) “Whereas X, and whereas Y…” signal courts to
             R §203 (b) a sequence of preferences: express terms > course of
                performance > course of dealing > usage of trade

B.      Allocation of risks
        Conditions and warranties help to shift the risk onto another party. Courts
generally enforce conditions and warranties to which parties agree (POLICY: preserve
the bargained for exchange…CAVEAT EMPTOR). Conditions: (1) express; (2)
constructive. Things that ensure one parties obligations to perform don’t arise until a
condition is satisfied (I’ll paint the house, but on the condition that I need two people to
help me). Warranties (1) express; (2) implied. These create liability for deviations from
what’s warranted in a contract. Condition asks have the obligations ripened or come
alive; Warranties ask whether or not one party is liable for deviations from what was
promised. KEY POINT: conditions protect, warranties attack by assigning liability.
Express condition: obvious in the language. Implied: implied in fact (from the

circumstances). Constructive: implied in law (court finds that it should be there,
judicially imposed).
         (1) Express Conditions: (R §§ 224-229) This tends to involve language
             “provided that”, “upon condition that”, “if”, or “subject to”, etc, creating a
             presumption of condition. Arises only from contract, are usually pegged to
             the event (either within one or neither of the parties control). Courts don’t
             inquire into the substantive value. Good faith rules this, but actual
             performance won’t ripen until condition is met. Express conditions are in
             language and openly obvious.
              Implied conditions are interpreted from surrounding behavior.
             Excuse to conditions: non-occurrence (may not necessarily discharge the
             duty); waiver (a party who normally would be able to get out can’t
             necessarily if the party waives…waiver of the condition, or if protected party
             breaches); satisfaction; forfeiture (excuse based on economics and equity…in
             cases where non-payment rests on tiny imperfections; Jacobs & Young case).

            (a) Nature & Effect

                Dove v. Rose Acre (sick law student forfeits summer bonus from the egg
                 A party is bound to perform conditions accepted to under
                   contract, and performance is not required unless those
                   conditions are met.
                 Dove knew the conditions and failed to meet them, despite efforts by
                   his employer who offered to let him sleep on the couch, or make up
                   the days
                 Case is primarily useful as to what is an express condition and how
                   harshly it can operate
                 The condition has bite! It was explicit, no fraud, not waived, etc…

            Parties can agree on who bares the risks (scope). Courts don’t like forfeiture,
            b/c courts don’t like to throw one party out for minor faults. If a condition
            has bite, tehn it must be satisfied for the parties performance to ripen. In a
            non-satisfaction of a condition: 2 things can happen: (1) suspends the other
            party’s obligation; (2) duty may be discharged. Conditions are time
            dependent…when does obligation to perform ripen.

                Wal-noon v. Hill (repairing of the leaky roof w/o notice to owner)
               A lessee’s compliance with a provision requiring him to give notice
                of any defects is a condition precedent to the lessor’s performance to
                his obligation to perform (he could’ve done it for cheaper, but you
                never notified him)
               Wal-noon is a circumstance of implied condition…no explicit condition
                to give notice before repair, but court says contract is implied in fact
                (impossible w/o it)

               Jacob & Young v. Kent (case of the wrong pipe, not of reading
             House builder sues to get payment despite the wrong (but same quality)

       Where the non-satisfaction is grossly disproportionate to the
        oppression (what it would take to fix the problem) the breach will
        sometimes be considered trivial IF, the non-satisfaction was
       Where it is grossly out of balance, owner is entitled to the difference
        in value
       POLICY: promotes justice when there is substantial performance
        with trivial deviation!
       Dissent…tows the hard-line and would require replacement of the pipe!
       Despite the condition, performance can be substantial enough so the
        party still has to pay. Question becomes how much is enough?
       If this rule didn’t exist, there would be a windfall for the other party and
        the contractor would be over penalized.

        In re Carter
         Plaintiff agreed to purchase company valued at a certain price, seller
             states that there has been no change in financial condition and that
             the condition would not be less favorable. After  bought the
             company, it was less valuable and court treats it as condition
         Express condition precedent to a party’s performance to a contract
             may not be treated as a warranty
         Common difference between conditions and warranties
         Here, the condition was waived by accepting the terms of the

     (b) Excuse of Conditions
         Excuse can be raised (party will argue): (1) no condition at all; (2)
satisfaction of condition. How do we excuse a condition that wasn’t met?
Excused for 2 reasons: (1) waiver by the other party in the form of a later
modification; (2) breach by the other party as in “they prevented me from
satisfying” or “the other party failed in the contract too”. POLICY: Courts
dislike conditions because it puts them in an all or nothing scenario (no condition
met, no contract). BUT, the fact that conditions create forfeiture under the
written contract, doesn’t mean quantum merit or estoppel theories can’t be raised.
Alternative techniques for courts to do equitable justice. Factors that lead a
court to do this instead of giving bite to a condition: (1) utility (95% of a mowed
lawn is a good thing); (2) context (what are the circumstances of the case); (3) is
the enrichment unjust.
         Reasons for excuse:
         (1) subsequent later agreement to discharge the condition (parole
             evidence problem; you can make this explicit…BUT does it require
             consideration: UCC §2-209(1) no consideration necessary (same
             in Rest.); POLICY: allows parties to change position w/o
             consideration, and to allow parties to waive w/.o consideration b/c
             they may be business decisions);
         (2) waiver implied by conduct;
         (3) doctrine of impracticability (the condition can not be done or can not
         (4) discharge by the court as a function of substantial performance.

        Clark v. West
         $6 a page if he abstains from alcohol, he gets paid $2, and he wants
            more, arguing that condition was waived. Company argues that
            alcohol was consideration (if abstinence is consideration he’s out; if
            condition, court could find that it was waived)
         2 arguments for : (1) condition was waived; (2) even if not waived,
            I wasn't intoxicated for most of the time (equitable estoppel).
         Court finds that it was a condition ( it wasn’t a contract to keep him
            sober, but a condition to keep him sober for writing good books)
         Theory of waiver…if the company was on notice (they knew he was
            drinking) & they told him not to worry about the extra $4. (either
            waived by saying nothing, or saying something)

        Aetna Casualty v. Murphy
        terminated lease with Aetna’s insured, and then Murphy damages the
        place as he’s moving out. Murphy gets the complaint but doesn’t notify
        his insurance company (Chubb) for 3 years.
       Murphy’s contract stated that he had to give notice to the insurance
        company as soon as was practicable.
       If Chubb was hurt by not being noticed earlier, then you can quantify it
        (the amount Chubb was hurt would be subtracted from his payment)
       HOOK: Chubb says that the condition wasn’t met and so the contract
        was discharged. (Subjective test to determine whether or not the
        condition was waived)
       Non-performance is excusable b/c the court couldn’t find any
        prejudice/injury to chubb, and the contract was one of adhesion (court
        construes against insurance company giving latitude to Murphy)
       There can be satisfaction of a condition and an excuse that can lead to
        performance of the contract (court provides protection for the insurance
        company, yet allowing the party seeking excuse to prove that the
        insurance company was not injured!)
       This is an example of flexible excuse rule, as compared to the hard-
        line rule in Dove (elaboration of the doctrine of substantial performance
        in adhesion contracts…no face to face negotiations as in Dove)

(2) Constructive Conditions of Exchange
         R§ 234: order of performance (gap filler). Hypo: $500 to paint a
house. You say money first, I say paint first! Who does what first? Without an
express condition, use default rule of §234. Parties can contract around it, but
gap filler if no specifics. Under (2) if something requires a period of time, it
must be done first.
         3 types of conditions: (1) express; (2) implied in fact (circumstances) or
implied in law (courts); (3) constructive. Constructive conditions usually raise
the question of who performs first (order of performance). Contracts are
designed to allow parties to exchange at different times (promise to pay later for
performance now). How substantial must performance be? What happens if
there is a breach? Original contract law: original party’s breach is not an excuse
for your performance (I still have to pay, but then can sue you to get it back).

Today, §234 means one party’s obligation must precede the other unless it is
expressly stated.

        Jacob & Young
         Could construe constructive condition of the installation of reading
            pipe here…BUT, court finds close enough for satisfaction!
         2 tests for satisfaction: (1) substantial performance; (2) exact
            performance (dissent)
         difference between a shield (I don’t have to pay b/c condition not
            satisfied) & a sword (I’ll sue you for $ b/c the condition wasn’t

        O.W. Grun Roofing
         the question centered around the aesthetic value of the color of the
           shingles installed by defendant…how much is the loss
         does the homeowner’s obligation to pay arise b/c of the substantial
           performance…NOT HERE!
         Doctrine of substantial performance: a promisor who has
           substantially performed is entitled to recover although he has failed
           in some particular to comply with his agreement (very common in
           building agreements)
         Test for substantial performance: (no general rule, just
           guidelines and factors…highly fact specific). Weigh: (1) the
           purpose to be served, (2) the desire to be gratified, (3) the excuse
           from deviating from the letter of the contract, and (4) the cruelty
           of enforcing strict adherence or of compelling the promisee to
           receive something less than for which he bargained. Subject to
           the contractor acting in good faith (innocent mistake) & not so
           essential to the object of the contract.
         Theory of quantum meruit (“as much as he deserved”)reasonable
           value of services (damages awarded in an amount considered
           reasonable to compensate a person who has rendered services in a
           quasi-contractual relationship)…this is the basis for diminution in
         Court infers the women got no benefit…ugly roof! POLICY: Court
           wants to avoid windfall to plaintiff who will just pocket the money
           and live with the ugly roof.
        Lowy v. United Pacific Insurance Co.
         Lowy completes 98% of a grading contract and then quits do to a
         A contractor may recover for work actually performed under a
           construction contract if he has substantially performed his
           contractual duty in good faith.
         Court finds a severable contract b/c the consideration was
           apportioned in phases… was prevented from completing 2% of the
           project when  hired another company
          acted in a good faith dispute, and substantially performed and
           therefore is entitled to payment for his services.

(3) Representations of warranties of quality

         Warranty disclaimer and remedy limitations accomplish similar things in
different ways. Warranties concern the topic of duties…what are the scopes of
the duties between buyer and seller? Completely different angle is a remedy
limitation (has nothing to do with the duties). Defines the extent of the remedy
rather than define the extent of the duty under the contract. The law treats them
differently… How you characterize something changes the outcome of the
claim, despite the substantive goals being exactly the same.
         Warranties: (1) allocate risk (marketability); (2) unconscionability
(prevents unconscionabiliity in things like door to door sales (if passes 316, a
court may still strike it down under 302). 2 ways to allocate risk: (1) warranty
disclaimer (concerns duties; disclaimer: are obligation is only X not Y); (2)
remedy limitation. (if X doesn’t work, your remedy is to call and we’ll send you
a new one; remedy, not duty!)
UCC §2-313-316:
 313: Express Warranties by Affirmation, Promise, Description, Sample:
     ways parties can create warranties by promises, etc.
 314: Implied Warranty: Merchantability; Usage of Trade
     Warranty of “marketability”(you buy a boat and it doesn’t float, boat
         seller can’t say too bad)
     Must be a “merchant of goods of that kind”
     POLICY: shift the risk to the merchant (move away from caveat emptor)
 315: Implied warranty: Fitness for particular purpose
     when you have a special or particular purpose, and you rely on the
         seller’s skill
     different from 314…you don’t need to be merchant of goods of that kind.
     Must reasonably rely on the person skill and knowledge (objective test)
     Burden is on the buyer to show the merchant reasonably knew of his
         particular purpose.
     POLICY: shift risk (move away from caveat emptor)
 316: Exclusion or Modification of Warranties
     (1) presumption for terms in/and in relation to contract is that they are
         consistent…if not, express terms in contract win
     one that affords the broader protection governs (similar to adhesion
     if seller’s promise is only oral, then you have a parole evidence problem.
     (2)
     lets the buyer decide, says nothing about the content of the disclaimer
         (protects procedural aspects) (creates incentives for disclosure)
     deals w/ all warranties excluded (express or implied)
     POLICY: Protects from unfair surprise (procedural unconscionability)
     POLICY: shift the risk (move away from Caveat emptor)
 719: Contractual Modification or limitation of remedies
     hybrid…addresses warranty and remedy exclusions (should’ve been in
     focuses in minimum adequate remedies of substance (substantive

                       (2) what is essential purpose: you buy a yacht and manufacture
                        warranty says in case of defect we’ll repair the defective part. If it sinks,
                        you have no remedy, therefore, warranty failed the essential purpose.
                       official comments address the same things as 316 (when can you get out
                        of liability)
                       must be some remedy available for the buyer. POLICY: prevent

               Henningson v. Bloomfield Motors:
                an express warranty that seeks to severely limit the manufacturer’s
                  liability and that disclaims all other warranties can be void as against
                  public policy
                Henningson before UCC…this kind of case gave rise to §2-719 protections
                  (now you can’t limit or exclude consequential damages in personal injury
                  from consumer goods).
                Shows us the conjunction between §2-302 and warranty.
                There was gross inequality of bargaining power

               Murray v. Holiday Rambler
                Where the remedies in a limited warranty fail to correct a seller’s
                  breach, the limitations will be disregarded in favor of ordinary UCC
                If the remedy fails under §2-719, how long must the consumer wait?
                  (perhaps reasonable time)

       A.      Overview of damages: (Sheila Hypo & Damages matrix)
       The goal of contract remedies is to protect the expectation interests of the non-breaching
               1.      Introduction: Why people keep promises?
                       (a) utility (why people keep promises): (1) I should keep my promises or
                           my reputation will be damaged; (2) (retribution) I’ll hurt you if you
                           hurt me; (3) divine retribution.
                       (b) Business reasons: costs to defending a breach (money, court, time,
               ****hypos on 3/24****
               2.      Efficient breach: Pareto Superior = at least one party (breacher) is better
                       off and no one (non-breacher) is worse off (society benefits). In most
                       cases, it is more economically efficient to breach when there is a better
                       offer, b/c all parties will be better off in the end. (see handout) Note: this
                       model does not take into account everything (assumes a lot). Tend to
                       undercompensate for anxiety of breach. Even if you cover, you may get
                       gray hairs in the process. (doesn’t account for the intangibles)
                                Bread Hypo: (WHY ENCOURAGE BREACH?) Remote area
                       has 1 market & sells bread. 1 man in town contracts for the entire load
                       for art project. Snow storm hits, no food, truck arrives. The need price
                       increases 10x. If breach is over-deterred, market must give bread to man
                       and not people. POLICY: sometimes you want breach to more

     efficiently distribute resources. Note: this discourages punitives…if
     people need bread and penalty for breach is 100K, store might not be
     able to afford the breach. Courts are ethically neutral in respect to
     commercial breach (legal system doesn’t prevent breach, just redresses
     it…law just defines the consequences).
3.   Breach: (1) promisor fails without justification to perform when due
     (promisee has done his part, but promisor is holding out) REMEDIES:
     specific performance or an action for damages
     (2) promisee has not yet performed (no one has done anything b/c
     promisee hasn’t done his part) Promisee’s duty is discharged (shield)
     REMEIDES: damages or specific performance.
4.   Repudiation: valid K and promisor by word or conduct materially
     repudiates conduct not yet due. HYPO: on Friday you say you’ll clean
     my pool and I’ll pay you $500 and on Wed., you say forget it
     (performance is not due until Friday) Did you breach? (a) it is a breach;
     (b) if the non-breaching party had performed at the time repudiation was
     tendered, non-breacher can sue for the contract price or for damages or
     specific performance.
5.   Special Case scenario: words or conduct in the circumstances create
     special doubt about a valid contract performance. HYPO: Contract with
     S to put up a wedding tent. 2 days before the wedding you see S packing
     his tent up (he hasn’t breached, but you doubt he will perform). What
     can you do? (a) suspend performance temporarily (hold up installment
     payments); (b) demand adequate assurance that he will perform (if he
     doesn’t give it, you can treat it as repudiation).
6.   Types of remedies: (start with expectation and then look to others
     depending on the facts of the case)
     (a) expectation damages (compensatory): put the non-breaching party
          back into the same economic position as if the contract had been
          performed without breach (default presumption) HYPO: I’ll paint
          your house for $500 on Friday. I expect to get my $100 profit!
     (b) punitives (exceptions to the default rule) can be assessed in
          aggregious bad faith: (1) tortious conduct; (2) fraud. POLICY: just
          don’t like fraud and bad faith.
     (c) specific performance: when goods are unique, there is a better
          opportunity for specific performance, b/c it is harder to calculate the
          precise value (there aren’t numerous alternatives…VERY RARE!)
          POLICY: $ doesn’t always get you the exact thing!
     (d) reliance: designed to attempt to put the non-breaching party in the
          position they were before they entered the contract! HYPO: I get
          back the $400 worth of paint I bought to paint the house.
     (e) restitution: designed to dis-gorge from the breaching party any
          benefit the breaching party got from the non-breaching party! (not
          focussing on the individual parties’ positions) HYPO: I pay you
          $100 to sell X. You don’t sell X, I get the $100 back!
     (f) consequential: damages beyond incidental that are foreseeable in
          light of the breach
     (g) incidental: damages that flow directly from the breach (usually cost
          of arranging a substitute)
     (h) liquidated (stipulated): contractual term limiting the amount of
          damages available in cases of default (determined in advance).Note:

            VERY cost-effective method esp. if parties know each other and plan
            to continue dealing.
7.      Definitions:
         Reliance can be divided into essential and incidental reliance.
            Essential are those things that one party absolutely have to do for the
            deal to come together (doesn’t mean that they are contracted for).
            Incidental are things done unique to that product in reliance upon
            the delivery (reliance is not essential to their performance…special
            accessories to a particular hot tub). THE closer it is and the more
            unique it is to the product, the more incidental it probably is.
         Loss in value: what you would have received minus what you
            actually received. (K – any installment payments thus far).
         Cost avoided: expenses you would’ve had to incur but don’t now
            that the other party breached (no longer have to pay someone to
            install b/c of a breach)…think of it in terms of expectations or things
            you would’ve expected to pay had the contract been performed.
         Loss avoided: a term to describe a way of minimizing damages
            through resale. (avoid losing the full value of the items by reselling
            the items to another party, or reasonably could’ve sold the items but
         Incidental and consequential damage…Incidental: directly from
            the breach, usually expenses, as a consequence of trying to avoid loss
            (costs of arranging a substitute). Consequential: damage beyond
            incidental that is foreseeable in light of the breach. (sometimes
            charged against the breacher and sometimes not).
         Nominal damages: you get damages because you won in principle,
            but not a lot ($1 becomes symbolic or nominal).
         Expectation damages: put the non-breaching party back into the
            same position that they would’ve been in had the breach not occurred
8.      Policy objectives:
        (a) contracts are about shaping our future and specifying the results
        (b) avoidability: could no breacher avoid the loss
        (c) certainty: how certain is it that the loss is valid
        (d) foreseeability: what if $1 widgets would be used in a $1mill.
9.      Cases:

Sullivan v. O’Connor (messed up nose)
         A physician who breaches K to effect a particular result is liable to
            his patient for the cost of any measures or treatment necessitated by
            the physician’s breach, and for any pain and suffering resulting
         Problem here is with expectation damages (hard to calculate…what
            was she expecting to get from her nose? The measure is the
            difference between a 2 nose and a 10 nose) Had the contract been
            performed she would’ve got a 10.
         Reliance: 2-6…before the contract, where would she have been?
         She has a perfectly functioning nose…hard to quantify expectation
         Restitution is too small (would only be her out-of pocket fees)

           Attorney here does a contract and a tort claim (Dr.’s aren’t usually
            sued for breaches like this)
         Court applies a quasi-reliance measure of damages: Restitution
            (focusses on the Dr.’s benefits; his fee); Reliance is the position
            she’d be in if no K (get her to the 6 nose & then get her back all of
            the fees associated with those costs of all the surgeries); Expectation
            she expected 2 surgeries, so she only recovers the pain & suffering
            and costs associated with the 3rd (unexpected ) surgery.
Allen v. Jones (K to cremate his brother’s body was botched)
         May damages for mental distress be recovered from an action for
            breach of K
         Damages for mental distress may be recovered for breach of K
            which so affects the vital concerns of the individual that severe
            mental distress is a foreseeable result of the breach.

F.D. Borkholder (addition to the showroom in furniture store did not prevent
moisture.  witholds payment b/c of it)
        Punitive damages are recoverable in breach of K only when
            accompanied by tortious conduct
        Punitives in K are RARE

Boise Dodge v. Clark ( sold  supposed new car (he had turned back
odometer).  finds out )
        Although an award of punitives must be reasonably
           proportionate to the amount of actual damages, judge or jury is
           entitled to exercise discretion in determining amount.
        Ordinarily punitives not awarded, but sometimes in cases of wanton
           & malicious breach, or when claim sounds in both tort and K.

Hancock Insurance v. Cohen ( was beneficiary of life ins. policy (monthly
paymnets for 20 yrs.). After 15,  stopped payments claiming policy issued for
20 yrs. by mistake.)
          Doctrine of anticipatory breach is inapplicable to a suit to
            enforce K’s for future payment of money only, in installments or
          Future payments do not have to be made until they are due…no lump

American Mechanical (’s repudiation of K to purchase real estate & machinery
led to foreclosure of ’s property)
          Breach of real estate purchase K an injured party is entitled to
             recover his actual losses when traditional recovery formula is
          Here, the court determines this loss was foreseeable to  ( still has
             a duty to mitigate

New Era Homes (under K to remodel ’s home,  was paid money at certain
stages. When  refused to make 3rd payment  sues)
         The inclusion of a provision in a construction K for partial
           payments to be made as the work progresses does not generally

            render K divisible, unless it is clear from K terms that each
            progress payment is intended to be so apportioned to the
            corresponding portion of the work as to be the full consideration
            for that portion of work
           No sign K intended to be divisible, so the application of quantum
            meruit or another theory is used

Bernstein v. Nemeyer (Bernstein  sought to rescind agreement w/  after 
breached his negative cash flow guarantee leading to the loss of the entire
         An injured party is not entitled to a restitutionary remedy where
            the breaching party has not been enriched and cannot be put
            back in the position he would have been before K.

Locks v. Wade (jukebox case)
         Where a lessee defaults on an agreement to lease an article the
           supply of which is not limited the lessor is not required to reduce
           his damages by the amount he actually did, or reasonably could,
           realize on a re-leasing of the article

Reliance Corp v. Treat ( co-op K’d to buy barrel staves from Treat. Price rises
during the 4 months between K and delivery,  did not perform)
         Whether a seller breaches a K by giving the buyer notice of
            renunciation or simply fails to perform the damages awarded the
            buyer shall be measured as the difference between K price and
            the market price on the date delivery was due.
         (UCC changed this rule §2-713) while the measure is still market
            price – K price, it is applied to the day notice of breach was made
            rather than to the day of delivery.

Rivers v. Deane (addition to home was constructed in such a faulty manner as to
render it unusable)
          in the case of faulty construction, the proper measure of damages
             is the market value of cost to repair the faulty construction.
          CTC awarded b/c it was so material (so bad)

American Standard ( contended measure was DIV not CTC for grading of ’s
land, American standard)
        Only where the cost of completing K would entail unreasonable
           economic waste will the measure of damages for breach of
           construction K be DIV of the property in relation to what its
           value would’ve been if performance was completed properly.
        Court says no economic waste despite the fact that market price was
           virtually unchanged through resale.

10.     When to shift from one type of damages to another
         Start with the idea of expectation damages (b/c of the notion of
          efficient breach)
         Move away from this when problems arise:

         The expectation damages become difficult to calculate (Sullivan how
          much would the nose have been worth had the surgery been
          performed correctly)
       Look to restitution (seems way too little…)
       Look to reliance (seems way too much…)
11.   Losing contracts occur when: (1) somebody just misjudges how much it
      will cost them to complete; (2) somebody intentionally enters into a
      losing K in order to resale higher later
       Suppose a builder would have to pay $2 million to be entitled to $1
          million payment. Suppose the landowner then breaches…would you
          then have to charge the non-breacher b/c they would’ve lost money
          anyway? No expectation (he expected to lose (note: no restitution
          measure either b/c that would require the breacher to pay more for
          breach than if non-breach)
       pro rata [KEYHOE] approach (relatively rare): calculating the % of
          building completed and giving the non-breacher the % applied to the
          contract price; sometimes the restitution is capped at the price of the
          contract). **This only works when the contract can be easily
       HYPO: Piper has K w/ city to lay 10 miles of pipe for $1mill. He
          lays half the pipe (cost him $800, 000: Losing K). Suppose the city
          scraps the contract.
           Restitution…Piper gets $0 b/c there is half a sewer to nowhere.
           Expectation is out b/c it is a losing contract.
           Reliance…is it fair the city should pay more than half b/c you
           KEYHOE…give you the portion of K price = to the amount

12.   Lost volume sellers: Suppose there is a contract to sell X. The price is
      $100. Suppose the buyer breaches…Suppose the seller then walks
      across the street and sells the bike to someone else for $100. Can you
      tell what the expectation damages are? It depends on the number of X’s
      that the seller has…If there is only 1 X, then the seller is no worse off.
      BUT…if there are 100 X’s, then the seller could’ve sold another bike
      anyway to the second buyer. (he would’ve profited from 2 separate
       Note: Selling the same good to another buyer for the same price does
           not make you equally well off. WHAT you get back under these
           circumstances is profit + (in some cases) incidental damages.
       The more unique and finite the item you sell, the less likely you are a
           lost volume seller. The more you generate to increase output to meet
           demand, the more you can argue for the lost volume seller.
       Remember…you are still trying to put the non-breacher back into the
           same position as if there had been no breach! (Juke-box case is a
           good example)
13.   Seller’s Remedies
       R §347 doesn’t distinguish between buyers and sellers…UCC

             UCC §§2-703 – 710…(see index)
             Slick Shoe Problem on p. 870
     14.    Buyer’s Remedies
             R §347 doesn’t distinguish between buyers and sellers.
             UCC §§2-711 – 716…(see index)
             §2-501 is the definition of identified
     15.    Cost to Complete (CTC) v. Diminution in Value (DIV)
             Usually arises in the service context
             CTC – Put the parties back to the same position as if the contract had
                 been performed (cost to complete performance)
             DIV – (Jacob & Young) If you were to put the non-breaching party
                 into the position had the contract been performed, this would create
                 economic waste in cases of minor, innocent deviations. POLICY:
                 protect the innocent breach.
             Factors courts use to determine which test: (1) substantiality; (2)
                 intentionality; (3) cost of each test; (4) the more substantial the
                 performance the more you go to DIV.
             CTC may create a windfall for the parties. (J&Y, should the law care
                 if they take the $ and go on a cruise)
             Value increase in completion… (grading of the mound)
B.   Non-breacher’s defenses: (focus switches to how  can defend against
     1.     avoidability: POLICY: we don’t parties to sit around out of spite and
            allow damages to run up. R §350. Duty to mitigate (cover): POLICY:
            we don’t want people to sit on their hands and allow damages to build up
            (inefficient use)
     2.     Foreseeability: (Hadley) reasonable considered to arise naturally
            (ordinary course of events; or in reasonable contemplation at time of K)
            and special circumstances…if neither party knows then damages will
            be capped by what a reasonable person would foresee in this
            contract setting. However, if the special circumstances are known,
            then foreseeability is expanded. UCC & Restatement move us from
            what was communicated to what is reasonably likely (from subjective to
            objective). Parties can contract around foreseeability if there is low or no
            procedural unconscionability. (Fed. Express air bill example)
                      POLICY: we don’t want to bring businesses to their knees by
            assigning all damages to breachers, this would lead potential breachers
            to have cover future loses and insurance costs (driving the price).
                      POLCY: efficient breach gives societal benefit. We don’t want
            to over-deter potential efficient breachers (have to give them an idea of
            how much will be assessed against them). Foreseeability encourages
            efficient breach!
                      POLICY: encourages breachers to inform themselves of the
            circumstances to prevent willful blindness (UCC §2-715(2)(a); R §351)
     3.     Certainty: R §352… (Hydraform) How do foreseeability and certainty
            differ? Certainty refers to the quantifiability (measuring damages that
            occurred) of the damages, not the arising of the damages. Certainty has
            nothing to do with whether a breach will lead to damages, it is a
            satisfaction of the fact-finder test, goes to what you claim now!
     4.     Hydraform (stove case)

        entered K with  for steel to make stoves. Delivery receipt signed
        by ’s agents disclaimed liability for consequential damages. Some
        steel was late. If steel for 400 stoves was ordered,  would stockpile
        steel in advance (delivery still late, etc.)  attempted to cover
        (obtain elsewhere), but could not.  sold stove division for $150K
        after only selling 250 stoves.  filed suit for breach claiming $100K
        lost profit, $220K for the loss on the sale of the business. Jury
        awarded consequentials of $80K &  appealed.
      Consequentials must be reasonably foreseeable, certain, and
      Seller must know of the general or particular requirements of the
        buyer to be bound by foreseeability.
      Damages sought must be reasonable consequences of the breach
      Consequentials may only be recovered if they could not be prevented
        by cover or otherwise.
      There was no certainty of future profits b/c the company was too
        new. DIV was based on future profits not ascertainable.
      Jury should’ve only calculated the loss in profits between the 400 (in
        K) and the 250 (sold).
5.   Hadley (mill case)
       was not aware of the mill’s closure and damages that might result
      test for foreseeability
      brings up issues of fairness and objective reasonableness. “Arising
        Naturally” refer to foreseeability…it is very ad hoc and fact specific.
      Key to the case…if neither knows, the damages are capped by what a
        reasonable person would think…BUT, if one explains the special
        circumstances, then you have notice and may be held to them.
6.   Spang
      Spang  agreed to supply steel to  (torrington) for use in
      Delays in delivery resulted in inconvenience and extra work for ’s
        employees (it got cold and they couldn’t complete the bridge)
      A party who breaches K may be held liable for all damages
        which could reasonably have been anticipated at the time the
        agreement was entered into.
      Explains Hadley: Although Spang did not know, this was arising
        naturally from your delays
      UCC has a statute of limitation for damages of 4 years (§2-705(1).
        Non-UCC common law, each state has its own.
      Liquidated or stipulated damages… appropriate damages agreed
        to by the parties ahead of time. Can be a very cost effective way of
        dealing with parties…BUT, this measure of damages is subject to
        superceding policy concerns: unenforceability by the courts due to
        unconscionability, or disproportionate windfall. (otherwise, this
        would allow parties to contract around the social benefit of efficient
      Courts draw a distinction between penalties and bonuses… Dove v.
        Roseacre…suppose the contract had been re-written merely to give

        him a bonus. (distinction between penalties and bonuses is minute in
        real life, but courts draw the distinction despite the same economic
        effect). HYPO: we’ll pay you 10K unless you don’t bill more than
        200 hours…or, we’ll pay you 10K if you bill more than 200 hours.
        (one’s a penalty, one’s not…courts disfavor penalties)
      UCC §2-718 Liquidated damages…amount void if too high!
        (creates incentives for parties to be reasonable) “OR” is a hard
        or…one or the other (post hoc, or ad hoc) anticipated OR actual
        harm caused by the breach. (either one can provide an avenue for
        stipulated damages to pass muster under (1)) The more specific the
        penalty (2-718) is, the more likely someone who has met that
        standard, the more likely they will be immunized from other
        statutory weapons (Safe Harbor)
      Seller’s don’t get consequentials b/c money use is not foreseeable
        (money is fungible (§1-201(17)) in a way widgets aren’t)


Description: Dislcosure Agreements document sample